Global Economics

Are Sony's Battery Woes Bound for Court?

Could Sony (SNE) get bogged down in a messy legal battle with computer makers? It's possible now that Toshiba (TOSBF) and Fujitsu (FJTSY) are considering seeking damages against Sony for its faulty computer batteries. On Oct. 16, the two said they are gauging how badly the fallout of the recall of Sony's lithium-ion batteries has hurt their brand image. Sony's own financial troubles could come to light when the company announces half-year earnings on Oct. 26.

Analysts aren't factoring in legal expenses as a drain on Sony's finances just yet. Nomura Securities' analyst Eiichi Katayama reckons that Sony will end up spending at least $330 million to replace batteries for up to 10 million computers worldwide (see BusinessWeek.com, 10/2/06, "Sony's Battery Exchange: A Huge Price Tag"). Others put the figure at closer to $500 million—and most say the costs could spiral higher if Sony has to defend itself in court.

But experts maintain it could be months before Toshiba or Fujitsu has enough evidence to make a case for compensation. Beating Sony in the courts wouldn't be easy since computer makers would have to show that the so-called "consequential damages" they're asking for were caused by Sony's flawed batteries, and that Sony might have anticipated the problem, says Stephen Rohrer, a counsel at Tokyo law firm Nishimura & Partners.

HEEDING THE RECALL. Toshiba and Fujitsu are the first to hint at possible legal action among the more than half-dozen computer makers involved in the Sony-related recall. Sony announced a global exchange program for problem batteries on Sept. 28. Back then, only Dell (DELL) and Apple (AAPL) had said that they would replace Sony-made laptop batteries for customers, and Sony estimated the recall costs topping out at $250 million.

Since then, more computer makers have joined the recall, including Lenovo, Toshiba, Fujitsu, Hitachi (HIT), and Sharp (SHCAY), likely inflating the costs to Sony. (Sony also supplies batteries to its own in-house Vaio division and other laptop makers such as Hewlett-Packard (HPQ), but they haven't issued recalls.)

Spokesmen for both Toshiba and Fujitsu said it's too early in the recall to calculate whether they deserve compensation. They have yet to make any formal demands on Sony, Sony spokeswoman Mina Naito said.

LEARNING TO SUE. In the past, it would have been unthinkable for Japanese companies to take their complaints to the courts. That's because such lawsuits would have gone against the government's postwar goal of rebuilding Japan and nurturing big domestic players. Many key companies sealed ties by owning equity stakes in each others' businesses, which also accounted for their avoidance of legal conflicts.

But in recent years, the practice has lost favor in Japan, and legal disputes between companies have been on the rise. The fact that Toshiba and Fujitsu are even considering legal action suggests how far Japanese companies have come in protecting their financial interests and becoming more responsive to investor demands.

The recall has become a huge headache for Sony Chairman Howard Stringer, who is trying to revive the Japanese tech maker's fortunes. Sony's share price gained 2.5% on Oct. 16, but it remains near a two-and-half-month low and it's more than 20% off its Apr. 21 peak for 2006.

LEGAL PROTECTION. Despite the global recall, Sony might not be as vulnerable a target as it seems. For one, contracts between tech companies typically hash out the procedures for settling disputes over product quality, legal experts say. Most spell out which side will bear the costs when recalls are needed to fix defective products.

It's unclear what's written in Sony's contracts, but computer makers would likely need to prove that the terms aren't fair given the damage caused to their products or earnings. To do that, their sales would have to nosedive or their products would have to get pulled off store shelves, and that doesn't appear to be happening.

TOO MUCH TO LOSE? Toshiba has other reasons for avoiding a potentially ugly legal spat with Sony. The Tokyo-based tech conglomerate is a major supplier of NAND flash memory for Sony's Walkman digital-music players and other portable gizmos (see BusinessWeek.com, 10/13/06, "Sony Walkman Wants the Spotlight Back"). Tense relations might drive Sony to sever ties with Toshiba and do business instead with Samsung Electronics of Korea, the world's No. 1 NAND flash maker.

Toshiba and Sony have also spent years developing the Cell processing chip in a three-way collaboration with IBM (IBM). The ultra-fast chips are expected to debut in Sony's PlayStation 3 videogame consoles in November. "I just don't think it's in Toshiba's interests to sue," says Standard & Poor's (MHP) tech analyst John Yang.